ArmInfo. Since 2022, Armenia's IT sector has experienced significant growth, largely attributed to an inflow of re-locants from Russia. During this period, the sector has become a key contributor to GDP growth, accounting for 1-3 percentage points. But recent data from the last two quarters show a concerning picture, indicating that currently the sector is encountering serious problems.
To understand the reasons behind this and explore potential solutions to prevent a decline from its current strong, Aghasi Tavadyan, Associate Professor at the Armenian State Economic University and economic analyst, shares his insights on his Facebook page. A
ccording to data from the State Revenue Committee, in 2019 88.3% of taxpayers in the IT sector were registered citizens of Armenia. However, by 2022 this number has decreased to 52.8% and further dropped to 48.4% in 2023. The data for the first half of this year shows a significant decrease to 12.6%. Tavadyan specifies that by the end of the first half of 2024, the number of IT companies with local registration had decreased from 5163 to 1174 (4.4 times), while IT companies with foreign registration recorded a sharp increase from 5511 to 8180.
However, as the economist notes, these figures contradict the dynamics of the number of employees. The number of employees of companies registered in Armenia decreased by only 5.5%, and this discrepancy may indicate several scenarios - data inaccuracies, mass closure of small businesses or a change in registration status. According to the CAG data, in 2019 88.4% of IT employees worked in local companies. By the end of 2022, this percentage decreased to 83.5%, and by the end of the first half of 2024, it dropped futher to 82.7%. This means that companies registered in Armenia have an average of 24.5 employees, while companies with foreign registration have only 0.74 employees on average.
This significant difference, according to the expert, may indicate the existence of multiple "postal companies". Most likely, in the first half of 2024, the "postal companies" registered by RA citizens were closed and reopened by foreign citizens. Such companies exist mainly on paper for tax or legal purposes, but have practically no real activity.
In addition, the average salary in the industry in 2018-2019 was about 550-600 thousand drams. By 2022, this figure had risen to 700 thousand drams, in 2023 and 2024 it increased to 1-1.1 million drams. "The peak of wage growth and the number of employees came at the beginning of 2023. The sharp growth began in early 2022, coinciding with an influx of migrants from Russia.
However, the growth rate has slowed down over the past year," Tavadyan noted. The decision to establish IT companies in Armenia was not based on the country's internal advantages, but rather on its membership in the EAEU. This membership guarantees free movement of labor, capital, goods and services between the member states of the union, the expert specifies.
What does the taxpayer list "cover"?
There are a number of interesting trends in the list of the largest taxpayers in the IT sector, Tavadyan notes. In January-June 2024, 79 IT companies were included in the list of 1,000 major taxpayers, which provided the state budget with AMD 45.9 billion in revenue. This amount is AMD 123 million less than in the same period of 2023. The contribution of IT companies to total tax revenues decreased from 4.8% to 4.4%. Synopsys Armenia tops the list with 12% of the income tax paid (AMD 1.1 billion). However, eight of the 20 largest taxpayers in the IT sector have decreased tax payments. Particular decrease was recorded at Veeam Armenia, Vmware, DataArt and EPAM, which is mainly due to a decrease in income tax.
The reasons for the decline of the IT sector
Revaluation of Armenian Dram, Revision of tax policy The Cost of Living in Yerevan Capital outflow
Long-term implications and opportunities
According to the economist, the current situation in the IT sector indicates the need to review its development strategy. The influx of IT professionals in 2022 was temporary and should not be the basis for long-term policy. The government's focus on tax collection as a key indicator could jeopardize the long- term strategy of tax relief necessary for sustainable GDP growth. In this regard, the economist suggests reviewing tax policy.
Relaxing the tax burden could help during an economic downturn. Meanwhile, the government, aiming to ensure further growth of tax revenues, is tightening tax administration and considering introducing new types of taxes or increasing existing tax rates. The expert is confident that this approach may have negative consequences. The famous concept of the Laffer curve in economics demonstrates that a continuous increase in the tax burden beyond a certain point can result in a decrease in tax revenues. This can occur because high taxes may encourage the shadow economy or reduce economic activity.
Tavadyan also suggests that Vanadzor be considered as an IT hub. He believes that city's strategic location between Yerevan and Tbilisi can be used to attract IT specialists through tax incentives. To address the situation in the right direction, the economist proposes taking control of the "management of the exchange rate". "Strong currency has a negative impact on the IT sector and export potential, while devaluation can stimulate the growth of public debt and capital outflow. This is why there is confusion over the Central Bank's interest rate cuts in conditions of almost zero inflation. This issue deserves a separate analysis," he notes.
The authorities should also think about providing affordable housing. Although capital inflows have mostly come from housing construction, the issue still needs to be addressed. "The coming months will be crucial for the future of Armenia's IT sector," summarizes Aghasi Tavadyan.
